Understanding Economic Agents and Market Systems

Economic Agents and Market Systems

Economic agents are the participants in an economy who produce goods and services and return them to obtain income and goods. Consumers are the ones who consume goods or services, generating income for producers through their purchases. In a simple economy, all economic transactions are carried out to produce domestic economic benefits.

Who provides what? The enterprise provides goods to the units of domestic consumption and, in turn, rents its productive factors. Its main function is the maximization of profit, with the objective of obtaining benefits by increasing the distance between production costs and the income collected from sales. Enterprises create value from existing productive factors, incrementing the quality of these factors through controlled and coordinated combinations to obtain demanded goods and services. The enterprise is responsible for providing society with the goods and services it needs.

The family acts as the main function to consume and satisfy needs and services. Driven by survival and primary needs (alimentation), they depend on the secondary needs of the society in which the family develops.

The Public Sector

The public sector acts as a regulator with the objective of achieving different administrations and maximizing the welfare level of all individuals in society. This includes public administrations, public enterprises, and the social security system. Its functions are:

• Fiscal Prosecutor: Obtaining public sector income through current expenses to finance the collection of taxes in an important and collective way.
• Regulatory: Fixing legal norms that regulate operation, which all agents must submit to, and regulating/stabilizing economic developments.
• Redistributive: Reducing socio-economic differences through the flow of different society members and ensuring a minimum welfare level.
• Supplying Public Goods: Providing goods and services of general utility.

Types of Goods

Preferences and needs dictate that consumer goods are not free and are scarce. Economic goods are scarce, limited within a system, and deplete when used:

• Consumption Goods: Destined for direct consumption, attending to diverse economic needs.
• Capital Goods: Destined for the production of other goods.
• <Public Goods: Susceptible to being utilized for an indefinite time by part of all determined individual citizens or a collective owner.

The Three Great Problems of the Economy

How to produce optimally to maximize the satisfaction of different needs?

• What to produce? Market guidelines brand the demand and production. The first concrete need is planted in quantity or quality, which enterprises must take into account.
• How to produce? Relies on the entrepreneur, the use of technical and efficient methods, and the adequate allocation of limited factors available to each economic system. Objectives include minimizing enterprise costs, maximizing consumer satisfaction, and achieving efficiency in the productive use of factors.
• For whom to produce? Must target a specific type of consumer with concrete needs regarding quality, quantity, and price.

The opportunity cost is the best option that must be abandoned to be able to dispose of a determined good. The Production Possibility Frontier (PPF) geometrically places all combinations of goods that can be obtained through successive allocations of existing resources during a period of time. Causes of production increases include results from previous investments causing increased production efficiency and modifications in technology.

The decision of consumer goods consumption is subjective and psychological, varying from case to case, based on self-esteem, sociological security, and the goods or services related to one's surroundings.

Arguments of microeconomics: consumer preferences and budget constraints.

Economic Systems

An economic system is formed by a set of institutions that determine how available resources must be used in order to satisfy individual needs.

• Planned Economy: Corresponds to countries whose government takes all decisions and decides what, how, and for whom to produce.
• Capitalist Economy: Individuals and enterprises take principal economic decisions on production and distribution. The public sector's role is assigned to market liberty to ensure economic and property rights. The factors of production are in private hands, and decisions are taken independently by consumers and producers, rarely considering social employment plans or the equitable distribution of produced wealth. The market uses distribution and service based on the conditions of supply and demand.

Supply and Demand: If supply is equal to demand, prices remain in equilibrium. If supply is superior, there is an excess of products, and market prices go down. If supply is inferior, it will clear the market, and prices will rise.

• Mixed Economy System: Based on the private property of most principal economic resources, where the public sector has an important participation in the economy alongside private enterprises, which generate the most amount of rent.

The Production Process

Production is the process through which productive factors are converted into finished products and goods.

• Elements (Inputs): Production factors necessary to produce (motherland, primary resources) whose outputs can be applied to obtain production processes.
• Technical Procedures: A series of methods through which entries are modified so that the sum of productive factors becomes finished products.

Enterprise Operation

• Control of Production: Methods need to be planned and supervised.
• Provision of Funds: Most provisions derive from loans and obtained benefits.
• Decrease of Costs: Obtained by increasing the volume of production.
• Specialization: When workers concentrate their efforts to approximate and maximize their qualities and abilities.
• Division of Work: Organizing work within the enterprise into concrete tasks, trying to assign them to persons with the highest capacity and lowest costs.
• Process Innovations: Better technical applications suppose that production with the same factors yields more productive goods. Product innovations introduce new products adapted to market demands.

Objectives of the Enterprise

The maximization of benefits. Benefits = Income - Costs

Normal Benefits: The level considered by enterprises as sufficient for permanence and production at their market level.

Extraordinary Benefits: An incentive level for enterprises when market demand causes production to exceed normal levels.

Enterprise Activity and Heritage

• Heritage: Goods (machinery, buildings, etc.) and rights (company actions that can be executed to recover used funds, such as advances).
• Investments:
  • Fixed Assets: Elements that remain in the enterprise for a long period of time.
  • Circulating Assets: Elements that belong to the enterprise for a short period and are replaced by others, including liquid parts.